Beware the Wide Divide Between Perceived and Actual Risk Tolerance

Dec. 4, 2017 4:03 p.m. ET

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Advisors need to help clients “bridge the gap” between their perceived risk tolerance and their actual risk tolerance, Carrie Coghill, president and chief executive at Coghill Investment Strategies in Pittsburgh, tells The Wall Street Journal.

Many investors have become so accustomed to seeing their stock holdings rise amid the long running bull market, they have a higher perceived risk tolerance now, she writes in a “Voices” column for the Journal.

Many don’t want to rebalance their portfolios and buy bonds because they are concerned about rising interest rates. However, when a market correction inevitably comes, clients who haven’t adjusted back to their target allocations are “going to be in an uncomfortable place and may have the urge to sell at the wrong time,” she tells the Journal.

She recommends advisors educate clients about what type of risk their portfolio already has. Then, she says, advisors need to show clients what volatility looks like in their portfolio with different mixes of stocks. Next, advisors should reassess clients’ actual risk tolerance based on these models.

Once you do these exercises, you can begin to discuss bonds as a risk management tool and explain, using real numbers, how this applies to their portfolio.

“By using real numbers to help clients nail down their actual risk tolerance and educating them about historical economical cycles, advisers can make sure that when the market turns, they’re well prepared,” she writes.

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